Property sector cools, but new report says no housing bubble to bust

The CIS report says a lack of housing supply is the main culprit for pushing up prices.

Mick Tsikas, file photo: Reuters

A series of private surveys show the property market is cooling, while a new report argues there is no property bubble to bust and that a decline in affordability is due to a lack of supply rather than investor speculation.

The National Australia Bank's quarterly property survey shows capital growth has slowed from 1.7 per cent in the first quarter to 0.9 per cent for the most recent three months.

The bank's survey of investors, real estate agents, developers and other market participants also showed a more subdued outlook for home price growth: Queensland (2.3 per cent) and Victoria (2.1 per cent) were expected to have the best gains over the next year, with Western Australian property the worst (0.2 per cent).

That property market weakness in WA reflects weaken rental returns, with rents down 2 per cent last quarter after a smaller fall in the first few months of the year.

New South Wales and Victoria also saw a slowing in rental growth last quarter according to NAB's survey.

Deteriorating capital and rental growth, combined with a decline in foreign buyer interest to its lowest share of the market in two years, drove the bank's Residential Property Index down 17 points to 19 - the lowest reading since mid-2013.

Victoria passed NSW as the best performing state last quarter, with WA having clearly the weakest market at an all time low of -29.

NAB says property professionals surveyed expect Victoria and Queensland to perform best over the next two years, with WA, South Australia and the Northern Territory the weakest.

A separate ANZ - Property Council of Australia survey also found a weakening in real estate confidence, albeit from high levels.

The index fell to 131 looking at the outlook for the third quarter, down from 140 at the start of the year, but still "well above the levels recorded for much of the past three years", according to the bank.

No bubble, price rises supply-related

A new report released today by Centre for Independent Studies economist Dr Stephen Kirchner argues that the rise in Australian home prices since the 1970s can be "well explained by economic fundamentals".

He says house prices have increased by about 3 per cent per annum more than general consumer price inflation since 1970.

Dr Kirchner argues this increase has been largely due to taxes and regulations inhibiting the supply of new land for residential development to keep up with demand generated by a growing population, smaller households and cheaper home loans.

The report says this increase in prices is likely to have been a factor in home ownership rates declining from 71 per cent in 1995 to 67 per cent in 2012, with even larger falls in the younger first home buyer demographics.

Dr Kirchner argues that lower interest rates have not made housing more affordable, as they have been a key factor driving up home prices - two separate economic studies find that a 1 per cent decline in inflation-adjusted interest rates causes a 4-5.4 per cent rise in house prices.

However, the report argues that lower interest rates are a longer term, global trend, and the home price rises they have generated are likely to be permanent - albeit with the risk that they could be reversed if rates were to revert to more typical historical levels.

Dr Kirchner says the best solution to improve housing affordability is increasing "land supply", by which he means the availability of new lots on the urban fringes, the re-development of disused industrial sites around cities and the more intensive development of valuable inner-city land.

He also argues development approvals need to be quicker, and taxes on new housing should be lowered to encourage more investment.

Dr Kirchner argues against policies that would potentially reduce demand for existing housing, such as removing negative gearing or placing restrictions on how much banks can lend to people for real estate.

"Reducing incentives for risk-bearing through the tax system will adversely effect the supply side of the housing market, as well as reduce demand, with uncertain implications for house prices and housing affordability," he argued.